Will SMIC Narrow Tech Gap?

SHANGHAI — Nobody questions that Tzu-Yin Chiu, CEO of Semiconductor Manufacturing International Corp. (SMIC), who took the company's helm in 2011, has brought much needed stability, confidence, and focus to China's largest foundry, its employees, its shareholders, and the global semiconductor market.

SMIC, based in Shanghai, is no longer the loss-making entity that was plagued with management turmoil back in 2011 when Chiu took the helm.

The company's revenue in 2013 reached a record high of $2.07 billion, showing 21.6% growth over 2012. Its net profit also reached a historical high of $173 million, compared to $22.8 million in 2012.

SMIC's revenue growth

Blue: Revenue; Red: Net Profit (Source: SMIC)

In the midst of SMIC's financial achievements, Chiu last week received the coveted Environment, Health, and Safety (EHS) leadership award from SEMI, the global semiconductor industry association.

With breathing room at last, SMIC now talks about the company's various milestones in its environmental, safety, and philanthropy activities. Chiu touched upon a "SMIC Liver Transplant Program for Children," an initiative launched last year to contribute 2 million RMB to fund liver transplants for impoverished children in China.

During a one-on-one interview with EE Times last week, Chiu didn't hesitate to express SMIC's interest in expansion -- beyond China.

Asked about IBM fabs that may be up for sale, as Big Blue executes its plan to withdraw from the semiconductor business, Chiu said he's interested. "Never rule out the possibility," he said. However, he quickly added, "Of course, we are aware of some of the issues... IBM is, after all, the jewel of the United States."

SMIC is rehabilitated. China's leading foundry's operation is much more stable. The company is building its revenue and profit growth based on, not a wild, but a modest, capacity buildup of 6.7% per year.

But is this all we can expect? Is this as high as SMIC gets?

SMIC's critics worry that SMIC, under Chiu's leadership, might have already given up the dream of directly competing with the world's Tier 1 foundries such as Taiwan Semiconductor Manufacturing Co. (TSMC), Samsung, and Intel.

One long-time semiconductor industry observer based in Shanghai, who spoke on the condition of anonymity, told EE Times, "The gap between SMIC and TSMC is not narrowing, but rather, widening larger in the last few years."

@double-o-nothing, yes, you're right...this could be another one of those great examples for the parallel universe. I would have never really give much thoughts to how important 40nm/45nm market is untiil I talked to T.Y.

Thanks for your thorough, detailed answers. As I go back to my notes, I do see RockChip are moving onto 28-nm for a couple of their quad-core APs and one dual-core AP this year; so is Amlogic. Certainly, MTK is moving to 28 with their quad core. But you are absolutely right. Most of them -- and their flagship chips -- remain at 40nm.

Minimum Order Quantity (MOQ) is not something vendors often talk about, but you shed good light on the issue. Thanks!

>@baybal, you are also right about the strong demand from >China's AP processor guys. Some of them are still using >40-nm process, butthey are definitely ;moving toward 28nm. >The question is, as you pointed out, SMIC's capacity.

The question is not so much about SMIC's 28nm capacity, but about their total capacity that they can market to AP makers, which includes service on few generations old nodes. When bigger AP makers will move towards 28nm, they will free up a lot of capacity on 45nm which will become available to lower tier fabless companies (think Actions/Infotmics/AMLogic/Nufront).

If these second-tierers will no longer need to go across the straight for capacity, they will get a very very significant cost advantage. Most of mainland fabless have no problems lagging few nodes behind the market. For them, going below 65nm does not change a lot as they are constrained by MOQs more than by per chip costs.

>@baybal, it's interesting you say that it is wise for >SMIC to stop chasing TSMC...I've heard others say >that too. So far, that strategy is definitely working. >The issue is what might happen three years from now...

It is unlikely that mainland fabless will need <28nm more than 45nm service in 3 years.

As you probably know, foundries give MOQs for wafers, and not for individual chips. You can make significantly more chips per wafer with 28nm than with 45nm, but you still need to reach the MOQ for wafers which will always be higher for a service on a node with higher market demand.

@baybal, you are also right about the strong demand from China's AP processor guys. Some of them are still using 40-nm process, but they are definitely moving toward 28nm. The question is, as you pointed out, SMIC's capacity.

@baybal, it's interesting you say that it is wise for SMIC to stop chasing TSMC...I've heard others say that too. So far, that strategy is definitely working. The issue is what might happen three years from now...

SMIC market position has definitely improved through post-crisis years. SMIC managed to weather the economic downturn and following waves of bankruptcies by entrenching themselves in stable niche markets (sensors) and generic 180nm+ service, something that TSMC were not interested in.

TSMC, on the other hand, made a possible error by putting all resources into 450mm/<40nm service that, after 5 year of development, has not reached the market. TSMC lost a sizeable portion of mainstream service market exactly because they were going towards <28nm too fast and trying to skip a node.

It was a wise decision on SMIC's part to stop chasing Taiwanese and to seek growth opportunities beyond TSMC dominated niches. While SMIC has no real way to compete with TSMC heads on in the high end VLSI/SoC sector, their current tactic is valid. SMIC is not out of risk zone yet, and they can be in red again the next year.

The competition in between SMIC and TSMC for mid-end sector seem to be already pushing prices and MOQs down. It will be interesting for me to see how much fab capacity SMIC's expansion will open to PRC's application processor market as it is crucial to PRC's domestic fabless brands (and to my income =).